Joel Greenblatts definition of earnings yield has the same problems the regular earnings yield does. It does not consider the growth of the company. It only looks at one-years business operation. For cyclical companies, the earnings yield is usually highest at the peak of the business cycle. But these earnings are rarely sustainable.

A better indicator of the attractiveness of an investment which takes growth into account is the Forward Rate of Return. Geron Corp's Forward Rate of Return for the quarter that ended in Dec. 2014 was 0.00%. The Forward Rate of Return uses the normalized Free Cash Flow of the past seven years, and considers growth. The forward rate of return can be thought of as the return that investors buying the stock today can expect from it in the future.

* All numbers are in millions except for per share data and ratio. All numbers are in their own currency.

Explanation

Joel Greenblatt defines the earnings yield using the above equation because it more accurately reflects the companys profitability relative to its stock price. Items like interest payment and tax etc. are not directly related to the companys operational profitability.

Enterprise Value instead of market cap (share price) is used in the calculation because it is the real price stock and bond investors together pay for the company.

Be Aware

Joel Greenblatts definition of earnings yield has the same problems the regular earnings yield does. It does not consider the growth of the company. It only looks at one-years business operation. For cyclical companies, the earnings yield is usually highest at the peak of the business cycle. But these earnings are rarely sustainable.

Forward Rate of Return based on Don Yacktmans definition is a better measure of the expected rate of return for a stock.

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